All You Need to Know About Pension Plans in India

Pension plans in India are designed to offer the dual perks of both investment and insurance policy coverage. By parking a specific amount of money towards a pension plan on a regular basis, individuals can build a retirement corpus. Such a corpus will help ensure that you have a steady flow of income after your retirement.

In this case, the sooner an individual starts to plan and execute their retirement plan, the better the outcome will be. Investing towards a retirement plan from an early age helps to build a robust corpus with a basic amount which generates wealth over time due to the power of compounding. 

Read along to learn more about pension schemes in India.

Should You Opt for a Pension Plan? 

Every individual must consider investing in a pension plan. Such a  move can offer them financial security and help them lead independent lives for years after retirement.  In fact, parking money in a pension plan that helps build a substantial retirement corpus can allow individuals to retire early in life. 

However, when selecting a pension scheme in India, individuals must choose one that aligns with their investment goals, especially their current financial standing. An ideal pension plan would be the one that generates a stream of income for the future but doesn’t strain the current earnings. 

Features and Key Benefits of Pension Plans in India

These are the key features and associated benefits of pension plans in India:

Based on the type of pension plan you opt for, individuals can avail of a fixed steady income. or immediate returns. Typically, a deferred plan generates a steady income after retirement, while an immediate plan offers returns instantaneously after investment. This allows individuals to pick a plan that suits their retirement goals and build towards the same steadily. You can use an investment calculator to ascertain the plan’s suitability more closely.

  • Tax-Efficiency

Some pension plans in India offer tax deductions under Section 80C of the Income Tax Act. This helps save money and protect the retirement corpus from eroding. Provisions under Section 80C, 80CCC, and 80CCD lays down the applicable tax benefits for pension plans. For instance, the National Pension Scheme and Atal Pension Yojana come under the purview of tax deductions under Section 80CCD.

  • Liquidity Component

Note that retirement plans have a low liquidity component. Regardless, some pension plans still allow subscribers the benefits of withdrawals. This makes them serve as a contingency for emergencies and will enable individuals to cater to their urgent financial needs without taking out a loan. 

  • Vesting Age

It is defined as the age when individuals begin to receive an income or a monthly pension from the plan. Typically, pension plans set the minimum vesting age at 45-50. However, some plans allow individuals to continue their investment towards pension plans till they are 70, and even up to 90 in some cases. 

  • Accumulation Period

Individuals have the leeway to either pay premiums towards the pension plan at intervals or at once. The parked wealth tends to accumulate over time and accrue interest over the accumulation period. When an individual starts investing in a pension plan at 30 and continues it until 60, their plan’s accumulation period will be a solid 30 years. 

  • Payment Period

This period is defined as the duration when pension plan holders start receiving pension after retirement. For instance, if an individual starts to get a pension from 60 to 80 years, their plan’s payment period would be 20 years. While many pension plans keep the payment period separate from the accumulation period, some may allow partial withdrawals during the latter to offer more flexibility to individuals. 

  • Surrender value

This is the amount one would receive on surrendering their pension plan before its maturity. However, it is recommended not time surrender a policy before its maturity as the same can result in the loss of plan benefits, including the life insurance cover and the sum assured. 

What are the Types of Pension Schemes in India?

Your choice of a pension plan is crucial, as selecting a policy that aligns perfectly with your retirement objectives can simplify the process significantly. 

That said, here is a list of popular pension plan types that one should know about:

  • Deferred Annuity

This plan accompanies a lump sum premium amount or a systematic premium over the pension plan tenure. Typically, the pension starts after the term. Notably, the plan doesn’t attract taxation unless the individual decides to withdraw funds prematurely. 

  • Immediate Annuity

This pension plan requires individuals to make lump-sum investments. Typically, individuals are offered pensions immediately after their investment. While the income generated under this plan is exempted from tax, the premium amount is liable for taxation. It also allows the nominee of the pension plan holder to claim a pension or the accumulated corpus after the policyholder’s death. 

  • Annuity Certain

Under this plan, the pension amount is disbursed across a given period, as chosen by the pension plan holder. In case of the death of a policyholder, their nominee can claim the pension. 

  • Pension Plan with Cover

The premiums paid go toward building a corpus and partly towards life cover. In case of the policyholder’s passing, their dependents are entitled to receive a lump sum amount. However, the life coverage is not that substantial. Individuals can use an investment calculator to ascertain how much corpus they would be able to build through such pension plans.

  • Life Annuity

In this plan, the pension is paid until the policyholder’s death. However, plans with spouse options allow the policyholder’s spouse to continue receiving the pension. 

  • National Pension Scheme

This government-backed pension scheme parks investors’ money into debt and equity instruments in their preferred ratio. It allows policyholders to withdraw 60% of the accumulated amount at retirement. The corpus withdrawn on maturity also attracts a tax of 20%. However, the other 40% is used to buy annuities. 

Today, several other government and non-government pension options are available in the market. Based on one’s needs and requirements, one can choose to invest in them and build a retirement corpus for a better tomorrow. 

Regardless of which pension plan you opt for, always make sure to estimate financial goals and current income. This will help you pick a plan that is adequate for your future needs but, at the same time, doesn’t strain your current finances. Additionally, don’t base your pension plan choice entirely on tax benefits, weigh in other features, too, to ensure maximum benefits. Keeping these in mind, you can start your hunt for the best pension plans in India. 

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